Managerial overconfidence and environmental sustainability disclosure: a signalling game with three disclosure choices

Greenwashing, strategic silence, and voluntary confession coexist and complicate environmental governance. We construct a signalling game model where environmentally informed firms select from three strategic signals. Incorporating consumer heterogeneity produces continuous demand response, and an overconfidence parameter lowers managers’ subjective audit probability. Analysis shows overconfidence progressively destabilizes transparent information transmission: as optimism rises, penalty deterrence weakens, voluntary confession incentive decreases, which triggers sequential collapse of separating equilibria and ultimately shifts market dynamics to pooling on false claims. The study reveals regulatory asymmetry: ex-post punishment loses effectiveness as overconfidence increases, while ex-ante structural barriers like stringent verification maintain robust deterrence. Our results support a regulatory shift from ex-post punishment to ex-ante verification.